PDF Check Point Software Technologies Ltd.

January 30, 2015

Check Point Software Technologies Ltd.

(CHKP-NASDAQ)

Current Recommendation Prior Recommendation Date of Last Change

Current Price (01/29/15) Target Price

NEUTRAL

Outperform 02/01/2011

$78.50 $82.00

Earnings Update: Check Point Reports Q4 Results

SUMMARY DATA

SUMMARY

Check Point delivered modest fourth-quarter 2014 results. While the top line beat the Zacks Consensus Estimate, the bottom line was on par with the same. Nevertheless, both revenues and earnings compared favorably on a year over year basis. The company also provided an encouraging first quarter and fiscal 2015 guidance. Furthermore, the rapid adoption of Check Point s data center appliances and the continuous enhancements in data center product lines are expected to provide adequate support to revenue growth. Moreover, Check Point s settlement with the Israeli tax authorities is a longterm positive. The company s continuous share buybacks bode well for investors. However, stiff competition, an uncertain economic environment, competitive pressures and currency fluctuations remain the headwinds. Thus, we reiterate our Neutral recommendation on Check Point shares.

52-Week High 52-Week Low One-Year Return (%) Beta Average Daily Volume (sh)

Shares Outstanding (mil) Market Capitalization ($mil) Short Interest Ratio (days) Institutional Ownership (%) Insider Ownership (%)

Annual Cash Dividend Dividend Yield (%)

5-Yr. Historical Growth Rates Sales (%) Earnings Per Share (%) Dividend (%)

P/E using TTM EPS

P/E using 2015 Estimate P/E using 2016 Estimate

Zacks Rank *: Short Term 1 3 months outlook

* Definition / Disclosure on last page

$80.81 $63.11

17.04 1.07

1,217,762

191 $14,977

2.14 70 29

$0.00 0.00

9.4 12.3 N/A

23.0 20.8 19.3

3 - Hold

Risk Level *

Type of Stock Industry Zacks Industry Rank *

Low,

Large-Growth Comp-Software

160 out of 267

ZACKS CONSENSUS ESTIMATES

Revenue Estimates

(In millions of $)

Q1

Q2

(Mar)

(Jun)

2013 2014 2015 2016

323 A 342 A 368 E

340 A 363 A 389 E

Q3 (Sep)

344 A 370 A 394 E

Q4 (Dec)

387 A 421 A 439 E

Year (Dec)

1,394 A 1,496 A 1,594 E 1,684 E

Earnings Per Share Estimates

(EPS is operating earnings before non-recurring items, but including employee stock options expenses)

Q1

Q2

Q3

Q4

Year

(Mar)

(Jun)

(Sep)

(Dec)

(Dec)

2013

$0.73 A

$0.76 A

$0.80 A

$0.92 A

$3.21 A

2014

$0.78 A

$0.81 A

$0.84 A

$0.98 A

$3.44 A

2015

$0.86 E

$0.90 E

$0.95 E

$1.07 E

$3.77 E

2016

$4.07 E

Projected EPS Growth - Next 5 Years %

7

? 2015 Zacks Investment Research, All Rights reserved.



10 S. Riverside Plaza, Chicago IL 60606

RECENT NEWS

Check Point Q4 Earnings Match Estimates, Revenues Beat Jan 29, 2015

Check Point reported fourth quarter 2014 adjusted earnings (including stock-based compensation but excluding amortization of intangible assets) of $0.98, which came in line with the Zacks Consensus Estimate. Reported earnings increased 6.5% on a year over year.

Revenues

Check Point s fourth-quarter revenues of $420.6 million increased 8.7% from the year-ago quarter and also surpassed the Zacks Consensus Estimate of $415 million.

The year-over-year revenue growth was aided by a 9.8% increase in revenues from Products & Software Blades and a 7.3% improvement in Software Updates and maintenance revenues. The company reported 19.5% year-over-year growth in revenues from Software Blades subscription.

Check Point witnessed higher demand for its data center and high-end appliances. Another factor that contributed to the overall growth was the increasing number of large deal signings. During the quarter, Check Point recorded 13% year-over-year increase in customers who signed deals worth $1 million or more.

Geographically, Americas contributed 48% of revenues during the quarter, Europe contributed 38% and Asia-Pacific, Japan and Middle East and Africa contributed the remaining 14% of total revenue.

Operating Results

On a year-over-year basis, adjusted gross profit (including stock-based compensation but excluding amortization of intangible assets) increased 8.2% to $368.8 million, while margins came in at 87.7% compared with 88.1% in the year-ago quarter.

Adjusted operating expenses (including stock-based compensation but excluding amortization of intangible assets) increased 10.1% year over year to $139 million as the company continued to invest in the business. The year-over-year increase can also be attributed to higher research and development, selling and marketing and general and administrative expenses. As a percentage of revenues, operating expenses increased 44 basis points (bps).

Adjusted operating income (including stock-based compensation but excluding amortization of intangible assets) came in at $229.8 million, up 7% year over year. However, margins contracted 85 bps primarily due to higher expenses.

Adjusted net income (including stock-based compensation but excluding amortization of intangible assets and other one-time items calculated on a proportionate tax basis) was $186.3 million or $0.98, up from $179.9 million or $0.92 reported in the comparable quarter last year.

Balance Sheet & Cash Flow

Check Point exited the quarter with cash, cash equivalents and marketable securities of approximately $1.31 billion compared with $1.24 billion in the previous quarter. Cash flow from operations was $210.4 million compared with $202.5 million in the previous quarter. During the quarter, Check Point repurchased 2.62 million shares for $195 million.

Outlook

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Check Point expects its revenues for the first quarter of 2015 to be the range of $360 million to $375 million. The company expects non-GAAP earnings per share between $0.89 and $0.93.

The company expects fiscal 2015 revenues in the range of $1.600 billion to $1.650 billion and earnings between $3.90 and $4.02 per share.

VALUATION

Check Point s shares are currently trading at 23.0X TTM earnings, a discount to the industry average of 36.8X but at a premium to the S&P 500 average of 18.4X. However, it is trading above the mid point of the historical range of 14.1X to 23.0X TTM earnings, which indicates limited possibility of upward movement from the current level.

Moreover, the shares are trading at a discount based on our 2015 forward estimates. The current 30.2% discount to the industry average for 2015 is lower than the average discount for the historical period of 59.7%, which indicates possibility of downward movement.

Nonetheless, we believe that the rapid adoption of Check Point s data center appliances and the continuous enhancements in the data center product lines are expected to provide adequate support to revenue growth. Thus, we reiterate our Neutral recommendation on Check Point and set a price target of $82.00.

Key Indicators

Check Point Software Technologies Ltd. (CHKP)

P/E F1

20.8

P/E F2

19.3

Est. 5-Yr EPS Gr%

8.9

P/CF (TTM)

22.4

P/E (TTM)

23.0

P/E 5-Yr High (TTM)

23.5

P/E 5-Yr Low (TTM)

14.1

Industry Average S&P 500

29.8 38.1 15.5 16.0 14.9 10.7

31.5 36.8 247.0 19.8 16.1 18.4 19.4 12.0

Cadence Design Systems Inc. (CDNS)

25.3 21.7 13.3

15.1 24.8 44.3 17.3

Red Hat, Inc (RHT)

60.2 51.0 17.4

35.4 58.3 80.1 45.5

PTC Inc. (PTC)

16.6 14.5 13.9

12.4 17.6 39.5 17.4

Verint Systems Inc. (VRNT)

20.1 17.9 10.0

16.7 22.0 N/A 13.2

TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow

P/B

Last

Qtr.

Check Point Software

Technologies Ltd.

(CHKP)

4.1

Industry Average

8.4

S&P 500

5.1

P/B 5-Yr High

P/B 5-Yr Low

ROE (TTM)

D/E Last Qtr.

Div Yield Last Qtr.

4.2

2.5

18.0

0.0

0.0

8.4

8.4

-10.3

0.2

0.3

9.8

3.2

24.8

N/A

2.0

EV/EBITDA (TTM)

16.2

5.9 N/A

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Earnings Surprise and Estimate Revision History

NOTE THIS IS A NEWS-ONLY UPDATE; THE REST OF THIS REPORT HAS NOT BEEN UPDATED YET

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OVERVIEW

Founded in 1993, Check Point Software Technologies Ltd. has evolved into a well-known provider of information technology (IT) security solutions across the world. The company is headquartered in Tel Aviv, Israel and offers a comprehensive range of software and combined hardware and software products aimed at IT security. Attached either to an operating system, a computer device, a server or a virtual desktop, the solutions cover network and gateway security, data security and management needs. Though the company is incorporated in Israel, consolidated financial statements are presented in accordance with the United States generally accepted accounting principles.

Check Point entered the industry with its breakthrough product, FireWall-1, equipped with the stateful packet inspection technology. A firewall is a device or a set of devices designed to protect networks from unauthorized access, while permitting legitimate communications. Stateful Inspection technology, invented and patented by Check Point, runs on a firewall or a PC and helps to extract and maintain extensive data for providing a framework for future screening decisions, from relevant communication layers. It also expedites network traffic inspection. However, Check Point has expanded its footprint from firewall to include a full enterprise security offering with endpoint security, remote access and network security.

The company s network security gateways protect customer data, reduce security complexities and lower the total cost of ownership. Customers are able to implement their security policies on traffic between internal networks and the Internet, as well as between internal and private networks that are shared with partners.

Check Point's solutions are deployed in nearly all Fortune 100 and Global 100 companies and in over 98% of the Fortune 500 and Global 500 companies across enterprises, service providers, small and medium sized businesses, and consumers. Its products and services are sold through a network of channel partners, including distributors, resellers, value-added resellers, system integrators and managed service providers.

The company operates one reportable segment and its revenues are mainly derived from the sales of its network and data security products and related software updates, maintenance, support and other services. Check Point has its operations in different geographic regions including the Americas, Europe and the Asia-Pacific, Middle East and Africa.

The market for Internet security solutions is intensely competitive, with well-capitalized players, such as Cisco Systems Inc., Juniper Networks Inc., Symantec Corp. and Microsoft Corp. Although Check Point has been a leader in critical network security markets through its VPN products, it is now coming out with complete end-to-end security solutions. Check Point faces tough competition as it moves into appliances against Cisco and Juniper, and into endpoint (PC) against Symantec and McAfee (acquired by Intel Corp.). Besides threats from large software companies like Cisco, Juniper and Dell, Check Point also vies against smaller, but more nimble security companies like Sourcefire.

REASONS TO BUY

Traditionally, Check Point has excelled in its firewall protection and antivirus solutions. However, the growing security threats and potential hacking attacks led the company to turn to an appliance-led model in 2007 and thereafter to Software Blade architecture in 2009. The blade architecture is becoming increasingly popular because it enables customers to choose from an archive of software blades and customize the solution to suit the user s requirements. Another reason for the popularity could be the architecture s subscription-based model. The product transitions eventually helped to

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